Micron MU: AI Driving Storage "Surge," Can It Break Through Cyclical Constraints?

Micron (MU.O) released its fiscal Q2 2026 earnings report (for the period ending January 2026) after the US stock market close on March 19, 2026 Beijing time. Highlights are as follows:

1. Overall Performance: Micron’s revenue for this quarter was $23.86 billion, up 75% quarter-over-quarter, exceeding the upwardly revised analyst expectations ($19.9 billion). The revenue growth was mainly driven by both DRAM and NAND businesses, each increasing over 70% quarter-over-quarter.

The company’s gross margin reached 74.4%, better than the revised analyst estimate (69%). Due to significant increases in storage prices, both DRAM and NAND prices rose over 60% this quarter.

2. DRAM Business: Achieved $18.8 billion in revenue, up 73.6% quarter-over-quarter, mainly driven by rising storage prices. The average DRAM price this quarter increased about 65% quarter-over-quarter, with shipments up 5%.

Specifically: ① Traditional DRAM contributed the largest increase, with estimated revenue around $16 billion, up over 80% quarter-over-quarter, as AI demand begins to boost DDR product demand; ② Dolphin estimates HBM revenue this quarter around $2.7 billion, up about $500 million, mainly benefiting from mass production and shipments of HBM3E and HBM4.

3. NAND Business: Achieved $5 billion in revenue, up 82% quarter-over-quarter. NAND revenue was mainly driven by price increases, with shipments up about 2% quarter-over-quarter, and average NAND price up approximately 78%.

Previously, due to the prolonged downturn in the NAND market, industry capacity was reduced. As AI demand extends into NAND, supply-demand mismatch has driven NAND prices sharply higher.

4. Operating Expenses: Driven by revenue expansion, R&D and sales & admin expenses continued to decline as a percentage of revenue. Core operating profit was $16.1 billion, with the core operating margin rising to 67.6%. The profit increase was mainly due to higher revenue and gross margin, with gross margin expected to exceed 74% driven by significant price increases in both DRAM and NAND.

5. Micron Guidance: For Q3 2026, revenue is expected to be around $32.75–34.25 billion, better than market expectations ($26.8 billion). The company expects gross margin to be about 81%, also above market expectations (76%). The guidance for the next quarter is notably better than market forecasts, still driven by continued price increases in traditional storage products.

Overall View: Despite the “explosive” performance, management’s communication was less than expected.

Micron’s revenue and gross margin this quarter significantly exceeded market expectations. With shipments slightly up, the performance growth was mainly driven by sharp increases in storage prices.

The company restructured its business segments: besides the growth in cloud memory (CMBU), the main drivers this quarter were the core data center (CDBU) and mobile & client (MCBU) units, both benefiting from substantial price hikes in traditional storage products.

Next quarter’s guidance greatly surpasses market expectations: Micron projects revenue of about $33.5 billion (±$750 million), up $9.6 billion quarter-over-quarter, exceeding the expected $26.8 billion; gross margin around 81%, well above the 76% forecast, indicating further significant price hikes in storage products next quarter.

Beyond recent results, key points about Micron include:

a) The long cycle of traditional storage: Nearly 80% of Micron’s revenue comes from DRAM, mostly from non-HBM products. The substantial price increases in DDR have notably boosted performance, and the current cycle of price hikes remains ongoing.

As AI large models shift focus from training to inference, demand for DDR and similar products increases: ① DDR demand on CPUs will rise, with single Vera CPU requiring about 1.5TB of DDR (three times Grace’s demand); ② Rubin CPX has chosen GDDR7 over HBM.

b) Certainty in AI storage demand: The current storage cycle is mainly driven by incremental AI needs, while traditional PC and mobile markets remain flat. Cloud giants are the ultimate buyers. Major industry players forecast high capital expenditure growth in 2026–2027.

Looking at Nvidia’s product layout, the main contradiction in data centers has shifted from “computing power” to “storage”: from Blackwell to Rubin, new additions like DPU (NAND) and LPU (SRAM) target storage.

On one hand, Google’s TPU now supports FP8, meeting most inference needs, narrowing the computing advantage; on the other hand, the speed of computation outpaces memory access, creating a “memory wall.” As models move from training to inference, storage capacity becomes more critical than raw compute power.

c) Capital expenditure outlook: Micron has raised its 2026 capex forecast to $25 billion (from $20 billion last quarter), exceeding the market expectation (~$22.5 billion). For 2027, management has given a significantly higher outlook but also mentioned in subsequent analyst calls that capex may decline after 2027.

Given Micron’s current market cap (~$519.7 billion), its after-tax core operating profit for 2026 is roughly 8x PE (assuming revenue +200% YoY, gross margin 78%, tax rate 14.5%). Due to the cyclical nature of the storage industry, valuation multiples during previous peaks (still in a price-increasing phase) ranged from 5–15x PE; current valuation remains on the lower end.

Short-term: The storage price hike cycle is ongoing, compounded by recent Samsung strike events, likely to sustain above-expected performance.

Samsung strike event: Samsung holds nearly 40% of the DRAM market. Recently, Samsung employees have expressed dissatisfaction over wage gaps with SK Hynix. The union voted to strike starting May 21 for 18 days. If halted, restarting production could take up to two months.

Medium to long-term: Beyond performance, the market is more concerned with “sustainable profitability,” including long-term contracts (lock-ins), customer demand security, and outlook beyond 2027. If cloud giants sign long-term agreements to secure supply, it would further boost future earnings certainty.

Management responded to market concerns:

1. Long-term agreements: Upgraded from 1-year LTAs to 5-year Strategic Customer Agreements (SCAs), with the first major customer signed—more about deepening cooperation than locking in supply.
2. Customer demand security: Micron’s mid-term demand from key customers is only 50–66%, unchanged from three months ago.
3. 2027 outlook: The company believes supply-demand gaps will persist in 2027 but cannot predict beyond that. Capex will be significantly increased in 2027, though some analysts suggest it may decline afterward (detailed notes forthcoming).

From the company and industry outlook, growth in 2026–2027 appears relatively certain. Customer demand security remains stable, but the company is cautious about post-2027 performance, mentioning the possibility of capex reduction.

Compared to the “spectacular short-term” results, the market is more eager for the storage industry to “break free or stabilize” from cyclical constraints. Based on management’s capex outlook, Micron’s valuation should still be viewed through a “cyclical stock” lens, which limits PE expansion potential.

Detailed analysis of Micron’s earnings:

1. Overall performance: revenue & gross margin far exceeding expectations
   1.1 Revenue:
   Micron’s Q2 2026 total revenue was $23.86 billion, up 75% QoQ, surpassing expectations ($19.9 billion). The growth was driven by both DRAM and NAND.
   From downstream segments, data center and networking contributed most, with mobile and PC segments also seeing significant growth due to traditional storage price hikes.

Looking ahead, the company expects next quarter revenue of about $32.75–34.25 billion, up roughly 40% QoQ, better than the $26.8 billion market forecast. The current cycle of storage price hikes supports this growth.

1.2 Gross margin:
Gross profit was $17.8 billion, with a gross margin of 74.4%, up 18.4 percentage points QoQ. The margin increase was mainly driven by rising prices of traditional storage products.

Despite inventory at $8.27 billion (up 0.8%), inventory turnover days decreased to 121 days, indicating healthy inventory management. The company expects gross margin around 81% next quarter, up 6.6 percentage points, implying continued price increases in DRAM and NAND.

1.3 Operating expenses:
Operating expenses were $1.62 billion, up 7.3% QoQ, but as revenue grew faster, operating expense ratio declined to 6.8%. Core operating profit was $16.16 billion, mainly driven by revenue and gross margin improvements. Overall, stable operating expenses contributed to profit growth.

2. Business segment details: traditional storage price hikes are the main growth driver
   DRAM and NAND remain the largest revenue sources, with DRAM accounting for about 80%.

The company restructured its reporting segments: previously CNBU, SBU, MBU, and EBU are now classified as CMBU, CDBU, MCBU, and AEBU. Data center/cloud now accounts for over 50%, reflecting strategic focus.

2.1 DRAM:
DRAM is the largest revenue contributor (~80%). Revenue this quarter was $18.77 billion, up 74%. The average DRAM price increased about 65%, with shipments up about 5%.

Specifically, HBM revenue is estimated around $2.7 billion, up $500 million QoQ; DDR and other products around $16 billion, up over 80%.
HBM products are positioned as secondary supply for Nvidia, lagging behind SK Hynix. With Samsung’s HBM3E passing Nvidia certification, the market share distribution will reset, with the three major players on equal footing.

Nvidia’s Rubin GPU and AMD’s MI400 will feature HBM4, so upcoming focus is on HBM4 development and shipments to gain more market share.

2.2 NAND:
NAND revenue was $5 billion, up 82%. While shipment volume increased about 2%, average price surged approximately 78%.
AI Capex initially boosted NAND mainly through HBM, but as AI inference demand grows, NAND benefits too.

Supply side: NAND market was previously subdued, leading to capacity cuts; now, supply is tight, with manufacturers prioritizing DRAM expansion. Demand side: AI applications, including Nvidia Rubin, are increasing NAND requirements, e.g., the new ICMS platform adds NAND storage for inference.

Each Rubin GPU can expand NAND capacity by an additional 16TB (as external memory), with a single NVL72 supporting up to 1152TB of NAND.